This paper will look at the law of supply and demand and how it is applied in real life.
The law of supply and demand is perhaps the most basic concepts taught in economics class. The law of supply and demand enables us to understand the setting of quantity demanded and price set in the market. It also stresses that the price level and quantity demanded varies according to changes in the markets through which there are movements within or shifts in demand and supply curves.
First, the law of supply stresses that: (1) "at higher prices, producers are willing to offer more products for sale than at lower prices;" (2) "the supply increases as prices increases and decreases as prices decreases;" and (3) "those already in business will try to increase production as a way of increasing profits" (qtd from Reviews of Laws of Supply and Demand 1). This law creates a supply curve which is upward sloping. Logically speaking, manufacturers will tend to decide to supply more in the market if the price for their product is high. With lower prices, they have less motivation to increase production as profits are squeezed out.
On the other hand, the law of demand states that: (1) "people will buy more of a product at a lower price than at a higher price;" (2) "at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price;" and (3) "at lower prices, people tend to buy some goods as a substitute for other more expensive"(qtd from Reviews of Laws of Supply and Demand 2). These reasons are consistent with the fact that people want to maximize utility through the consumption of more goods and services. Since they only have limited income, their overall aim is to find lower prices or lower priced goods in order to allocate this budget most efficiently.
The law of demand and supply determines the price charged and the quantity demanded in the market. Through market forces, the prices tend to be at equilibrium where suppliers are willing to sell goods and buyers would be willing to pay at that level. With this intersection also is the quantity demanded which determines the amount that buyers are willing to buy and suppliers are willing to provide the market with.
The operation of the law of supply and demand becomes more apparent in the present economic situation in the US. As customers struggle with lower income levels, they tend to buy lower priced goods than higher priced ones. This is true in my case; price becomes one of the primary considerations in my purchases because I would want to maximize the utility that I derive from my money. Also, I would demand more of a product if the price is lower. For instance, since burgers cost $4, I would only have to consume 1 in order to have money for drinks. However, if the price goes down to $2 each, then I will be willing to purchase two burgers.
For a supplier, prices now also become more constraining. They wouldn't want to sell products which will not be profitable for them. Using the burger example and assumption of $4 as the equilibrium price, suppliers would be willing to supply 20 burgers at that level. Raise the price to $5 and they would say that they would even want to supply 30 or more because of the profit prospect. If prices decline to $2, then they might